IN DEFENSE OF TAX HAVENS

March 18, 2009

A new form of "tax protectionism" is infecting Washington -- several serious proposals are being floated in the nation's capital that would penalize Americans for investing in low-tax rather than high-tax jurisdictions says Richard W. Rahn, a senior fellow with the Cato Institute.

Proponents say the measures are needed to catch tax cheats -- but ignore the fact that most of the low-tax jurisdictions such as the Cayman Islands, Switzerland, etc., already have tax information exchange (for cases of probable cause), or tax withholding, agreements with the United States and other countries such as the United Kingdom and France. Nevertheless, Sens. Carl Levin (D-Mich.), Bryon Dorgan (D-N.D.), and Max Baucus (D-Mont.), as well as officials of the Obama Treasury, want to make it more onerous and costly for American companies to do business around the world and for Americans to invest elsewhere. They would even make it more difficult for non-Americans to invest in the United States, says Rahn:

Levin's bill is a hodgepodge of tax increases, more regulations and penalties on American taxpayers doing business in targeted low-tax jurisdictions.

Dorgan's bill would prevent certain American companies that operate and are incorporated outside the United States from being treated as nondomestic corporations, thus denying them the right of tax deferral until their income is brought back to the United States.

Baucus, chairman of the Senate Finance Committee, is circulating a draft bill that, among other things, would extend the statute of limitations from three to six years for tax returns reporting international transactions.

The Treasury Department is proposing expanded regulations on foreign financial institutions that bring needed investment funds into the United States.

The so-called tax havens are for the most part no more than way-stations to temporarily collect savings from around the world until they are invested in productive projects, such as building a new shopping center or semi-conductor plant in the United States. This enables a better allocation of world capital, leading to higher, not lower, global growth rates, explains Rahn.

Indeed, to the extent tax competition between jurisdictions holds down the increase in the growth of governments, citizens of all countries experience more job opportunities and higher standards of living. And to the extent that businesses and individuals are discouraged by taxes or regulations from investing outside their own jurisdictions, they may simply choose to work and save less, period, says Rahn.